SEC Charges Former Supervisor at Colonial Bank for Role in Securities Fraud Scheme
FOR IMMEDIATE RELEASE
Washington, D.C., March 16, 2011 – The Securities and Exchange Commission today charged the former operations supervisor of Colonial Bank’s mortgage warehouse lending division (MWLD) with participating in a $1.5 billion securities fraud scheme.
The SEC alleges that Teresa A. Kelly enabled the sale of fictitious and impaired mortgage loans and securities from the MWLD’s largest customer – Taylor, Bean & Whitaker Mortgage Corp. (TBW) – to Colonial Bank. She caused these securities to be falsely reported to the investing public as high-quality, liquid assets.
The SEC previously charged former TBW chairman and majority owner Lee B. Farkas in June 2010, charged TBW’s former treasurer Desiree E. Brown in February 2011, and charged the head of Colonial Bank’s MWLD Catherine L. Kissick earlier this month.
“For nearly seven years, Kelly abused her access to Colonial Bank’s accounting systems, allowing Farkas and TBW to defraud the bank and its investors out of more than $1.5 billion,” said William P. Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.
According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, Kelly along with Farkas, Kissick and Brown perpetrated the fraudulent scheme from March 2002 to August 2009, when Colonial Bank was seized by regulators and Colonial BancGroup and TBW each filed for bankruptcy. Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank’s mortgage warehouse lending division to fund such mortgage loans.
The SEC alleges that TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. Kelly, Farkas, Kissick and Brown concealed the overdraws through a pattern of “kiting” in which certain debits were not entered until after credits due for the following day were entered. In order to conceal this initial fraudulent conduct, Kelly, Farkas, Kissick and Brown created and submitted fictitious loan information to Colonial Bank and created fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. These fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup’s financial statements.
The SEC’s complaint charges Kelly with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, including Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
The SEC’s case was investigated by Aaron W. Lipson, Yolanda L. Ross and Barry R. Lakas of the Atlanta Regional Office. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice’s Criminal Division, Federal Bureau of Investigation, Office of the Special Inspector General for the TARP, Federal Deposit Insurance Corporation’s Office of the Inspector General, U.S. Department of Housing and Urban Development’s Office of the Inspector General, and Civil Division of the U.S. Attorney’s Office for the Eastern District of Virginia. The SEC brought its enforcement action in coordination with these other members of the Financial Fraud Enforcement Task Force.
The SEC’s investigation is continuing.
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